New EU screening mechanism on foreign investment

The European Commission has proposed to establish a mechanism for screening foreign direct investment into the EU. The new screening mechanism will streamline EU policies when foreign investors acquire strategic assets in the EU.

A common EU approach on investment

The EU has one of the most open and liberal investment regimes in the world. Foreign direct investments (FDI) are worth about 36% of the wealth produced annually by the EU and the basis for 7.6 million jobs. FDI is therefore fundamental for ensuring the general welfare of EU member states.

In December 2009, the EU concluded the Lisbon Treaty. Consequently, the EU obtained exclusive competence with regards to FDI. It follows from article 3 (1) (e) and article 207 (1) of the Treaty on the Functioning of the European Union (TFEU) that FDI has become part of the common commercial policy. The EU has subsequently taken several initiatives relating to EU's external policy on foreign investments, for example by the conclusion of new trade and investment treaties. More recently, the EU Commission has prioritized EU's internal investment policy for attracting investments into the EU.

The EU proposal for an investment screening mechanism

For years, the EU has been a leading destination of FDI. However, foreign investors sometimes seek to acquire strategic assets which potentially allow investors to control European companies that operate in security and public order sectors. It follows from article 3 (1) TFEU EU that member states can adopt screening mechanisms for FDI, if they wish to do so. Several EU member states, including Denmark, have already set up national screening mechanisms. However, their scope and design vary largely.

On 13 September, the EU Commission proposed a new legal framework for screening of FDI on grounds of security or public order. This includes, for example, activities relating to the operation or provision of critical technologies, infrastructure, energy or information.

The proposed regulation includes:

A European framework for screening FDI by member states on grounds of security or public order

A cooperation mechanism between member states and the Commission

A European Commission screening mechanism for FDI which affect projects or programmes of Union interest

Security and public order screening
The proposed regulation provides a non-exhaustive list of factors to be taken into consideration when screening FDI on the grounds of security or public order (article 4). For example, member states and the Commission are required to consider the effects on critical infrastructure, technologies, and inputs which are essential for security or the maintenance of public order. Furthermore, it should be taken into account whether a foreign investor is controlled directly or indirectly by a government of a third country, including through significant funding. More generally, the proposal sets forth transparency obligations, the rule of equal treatment among foreign investment of different origin, and the obligation to ensure redress possibilities for decisions adopted under the screening mechanisms.

The cooperation mechanism
The proposed regulation establishes a cooperation mechanism between member states and the Commission (article 8). The cooperation mechanism obliges member states to inform the Commission and the other member states of FDI undergoing national screening. Member states are required to await the opinion by the EU Commission before making a final decision.

EU projects and programmes
The proposal also contains an EU screening mechanism concerning FDI which affects EU projects or programmes (article 3). An indicative list of projects and programmes is included in Annex 1 to the proposed regulation. This includes projects and programmes in the areas of research (Horizon 2020), space (Galileo), transport (Trans-European Networks for Transport, TEN-T), energy (TEN-E) and telecommunications.

Streamlining EU inward investment of EU concern

The proposal does not establish a requirement for member states to adopt or maintain screening mechanisms. Rather, the aim of the proposed regulation is to enhance transparency by streamlining investments of particular interest to the EU as a whole. The regulation establishes a qualifying framework for member states and ensures that screening mechanisms meet certain basic requirements.

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

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